Chrysler is close to repaying its government bailouts.
The company has lined up investors to help it refinance $7.5 billion in loans from the U.S. and Canadian governments, three people briefed on the matter said Wednesday. Under the deal, the company would take out $2.5 billion in bank loans and sell $3.5 billion worth of bonds to investors. Italy's Fiat, which has management control of Chrysler, would kick in $1.3 billion more to raise its stake in the U.S. carmaker.
The deal moves Chrysler closer to separating itself from the government, which was the only lender available to save the company when it nearly ran out of cash early in 2009. Chrysler would like to shed its image as a ward of the government, which has angered some potential customers who disliked the bailout. The refinancing also will dramatically cut Chrysler's interest payments, which CEO Sergio Marchionne has blamed for holding down the company's profits.
Details of the financing package are still being worked out and are scheduled to be finalized Thursday morning, the people said. It's likely that the money will change hands and the government debt will be repaid on Tuesday, said two of the people, all of whom asked not to be identified because negotiations are ongoing.
Chrysler took $10.5 billion from the U.S. government to survive two years ago, and it has repaid some of the money. The refinancing will allow Chrysler Group LLC to retire the remaining $5.9 billion balance on the loans, in addition to paying $1.6 billion to the governments of Canada and Ontario.
It also cuts the interest rate that Chrysler pays on the money to about 8 percent on the bonds and 6 percent on the bank loans from around 12 percent the governments charged per year, the people said. Interest rates will be finalized Thursday morning, the people said. Marchionne has said the government interest rates are excessive.
Last year Chrysler paid $1.2 billion in interest on the loans, or over $3 million per day.
Even with the loan payments, Chrysler still owes the U.S. government about $2 billion. Some of that could be recouped when the government sells its 8.6 percent ownership stake in Chrysler. Fiat has an option to buy the stake, or it could be sold in a Chrysler initial public stock offering that could come later this year or in 2012. Not all of the money will be recovered, though.
Canada got a 2.2 percent stake in Chrysler and could get more cash in the public stock sale.
Earlier this month Chrysler announced first-quarter net income of $116 million, its first profitable quarter since 2006. The profit resulted from the company's work during the past two years to climb out of bankruptcy protection. Chrysler has rolled out 16 new or revamped cars and trucks. Its sales are up nearly 23 percent this year because of new models, such as the Jeep Grand Cherokee SUV.
Chrysler had hoped the refinancing package would include $3.5 billion in bank loans and $2.5 billion in bonds. But when Marchionne and other executives went on the road pitching the debt deal in recent weeks, the bonds were popular and interest in loaning money to Chrysler wasn't as strong. Chrysler wanted more loans because they carry a lower interest rate.
Banks were unwilling to take on the amount of money Chrysler was seeking at the rate it was offering, said Wilmer Stith, portfolio manager with MTB Investment Advisors in Baltimore.
But interest in buying Chrysler's bonds was high amid a hot U.S. bond market as investors scramble for higher yields.
New bonds at around 8 percent interest are hot items for investors in an era of low interest rates, Stith said.
"The corporate bond market is certainly open for business," he said. "Lots of investors are looking for good, solid corporate bonds, both high-yield and investment-grade."
Chrysler bonds are attractive because they now pay 1.5 to 2 percent more interest than bonds issued by competitors General Motors Co. and Ford Motor Co., he said, adding that the GM and Ford bonds are in short supply.